Evaluating IPOs in Today's Saner Market Environment
by Robert Bridges and John Huber
Many investors “swore off” initial public stock offerings after so many IPOs collapsed in the 2000–02 bear market.
But 2004 saw a resurgence of interest in IPOs (initial public offerings). Renaissance Capital’s IPOHome.com reported a total of 216 IPOs, the highest since 2000, raising $43 billion (see Table 1).
In this article
- The Investment Decision
- Road Shows: The IPO Process
- The S-1: Understanding the Firm
- IPO Valuations
- The IPO Market Environment
- Different Timelines for Success
- Sources of Information on IPOs
- 5 Steps to Identifying High-Quality Companies With Sustainable Growth Prospects
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The most recent resurgence appeared to be along more traditional lines. Investment bank standards for IPOs had declined over 30 years from a minimum of four years of corporate profitability to little more than a good business model—if that—by the late 1990s. In 1999 and 2000, only a quarter of IPOs were by profitable firms. In contrast, 63% of IPOs in 2004 were from companies generating a profit. Another healthy contrast with the 1990s is that recent IPOs have been diversified across industries instead of concentrated in technology.
The IPO resurgence has lost only a little steam in 2005. IPOHome.com reported a total of 146 IPOs through mid-October, down from 151 over the same period in 2004, raising $27 billion.
Yet many individual investors are still leery of IPOs—they don’t know how to evaluate them, and they fear being played for suckers by insiders.
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John Huber is a principal of Geneva Investment Management of Chicago, LLC, an independent investment management firm located in Chicago and owned by its professionals. Geneva provides fee-based customized portfolio management services to individuals and institutional clients throughout the U.S. Geneva can be reached at 800/505-1720 or through its Web site at www.gimllc.com.